# Capital Budgeting

**Topics:**Net present value, Internal rate of return, Rate of return

**Pages:**4 (1147 words)

**Published:**January 8, 2013

Part I

PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time. 1a) If the discount rate is 0%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow

0-$400,0000%-$400,000

1 $100,0000% $100,000

2 $120,0000% $120,000

3 $850,0000% $850,000

Answer: The projects net present value is $670,000

If the discount rate is 2%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow

0-$400,0002%-$400,000

1 $100,0002% $98,039

2 $120,0002% $115,340

3 $850,0002% $800,974

Answer: The projects net present value is $614,353.45

If the discount rate is 6%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow

0-$400,0006%-$400,000

1 $100,0006% $94,340

2 $120,0006% $106,800

3 $850,0006% $713,676

Answer: The projects net present value is $514,815.59

If the discount rate is 11%, what is the projects net present value? YearCash FlowDiscount RateDiscounted Cash Flow

0-$400,00011%-$400,000

1 $100,00011% $90,090

2 $120,00011% $97,395

3 $850,00011% $621,513

Answer: The projects net present value is $408,997.46

With a cost of Capital of 5%, what is this project's modified internal rate of return (MIRR)? The formula is: MIRR = (-FV/PV)1/n-1-1

Answer: For this project, the projected MIRR is 42.72%

My next task was to build a graph and explain what is showed. Answer: The graph showed the net present value decreased as the discount rate increased. The net present value crosses the horizontal line at approximately 42%, just before the Modified internal rate of return of 42.72%. 1b) What is the projects internal rate of return?

Answer: IRR = 4.4184%

If the discount rate is...

References: Anthes, G. (2003, February 17). Internal rate of return. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78524/ROI_Guide_Internal_Rate_of_Return

Anthes, G. (2003, February 17). Net present value. Retrieved 29 October 2012, from http://www.computerworld.com/s/article/78530/ROI_Guide_Net_Present_Value

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